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Friday, April 02, 2010

FDIC Troubles Home Loan Sales: Correction and Clarification

"RoundPoint Mortgage Servicing Corp. successfully bid for an equity interest stake in the assets of failed banks in an auction held by the Federal Deposit Insurance Corp. (FDIC).

The equity interest stake, pooled together from 19 failed banks in FDIC receivership and titled Multibank Structured Transaction Single Family Residential 2010-1, sold for $34.4m.

Collectively, the loans have an unpaid principal balance of approximately $490.7m...."

"The RoundPoint bid equates to 42% of the unpaid principal balance of the portfolio, and the servicer will be responsible for managing the loans.

The 19 participating FDIC receiverships provided financing to Multibank by issuing approximately $137.5m of corporate guaranteed notes. The FDIC guaranteed notes will receive payments of interest and principal on a monthly basis."

As David, and commenter Mr_A11is noted, the 14c on the dollar is the equity contribution for the deal - the FDIC is leveraging that. It sounds a lot like the PPIP to me. Note, however, that the buyer, RoundPoint, didn't put up 14c on the dollar - they put up half that - or 7c on the dollar.

"This is one of the legacy loans program sales with 2 to 1 leverage. The FDIC provides a guaranteed non-recourse loan of $137.5 million and puts up an equity stake of $34.4 million. The private investor Roundpoint Mortgage Servicing puts up $34.4 million. The total purchase price is $34.4 + $34.4 + $137.5 = $206.3 million. Since par is $490.7, then the sales price is $206.3/$490.7 = 42% of par. See my paper about these FDIC transactions at ssrn.com/abstract=1476333

In other words, the sales price is 42%, not 14%. Since the FDIC guarantees the loan, it's more like 6-1 leverage, but let's not quibble...

Let's talk about one more thing, though... the article concludes, "The FDIC continues to find ways to offload assets from banks in receivership."

How is the FDIC offloading these assets? They are getting 7c on the dollar ($34.4MM) on the unpaid value of the assets, and guaranteeing debt on another $137.5MM of notes being written by the 19 participating receiverships! From my seat, it looks like the risk to the FDIC is only reduced by the 7c on the dollar of equity that RoundPoint contributed! The balance is either financed by, or guaranteed by the FDIC. But maybe the FDIC gets to move these assets off their balance sheet now? Probably... And people were all over Lehman Brothers for the Repo 105 transactions... This FDIC smoke and mirrors game does little to reduce their exposure.

In summary, this deal is not as bearish for real estate as I initially interpreted, but it's more bearish for the FDIC - who is bearing the risk in the deal.

Linus Wilson also commented: "These legacy loans sales means that the FDIC is bullish because they are selling a guarantee on a loan that they don't want to honor and they are retaining a 50 percent equity stake. The real estate bull is the FDIC. The sales price is inflated by the guaranteed non recourse loan"

I think that's another way of saying what I said - that the FDIC's risk is not being reduced here - they still have massive exposure and need these loans to perform well.

GYC - just to clarify, the FDIC already HAD the exposure - but this "sale" doesn't reduce their exposure - they still have the exposure!

in other words, this deal is not the one that transferred the risk TO the FDIC (that happened already when the banks failed), but we need to recognize that it also doesn't remove the risk FROM the FDIC.

This is one of the legacy loans program sales with 2 to 1 leverage. The FDIC provides a guaranteed non-recourse loan of $137.5 million and puts up an equity stake of $34.4 million. The private investor Roundpoint Mortgage Servicing puts up $34.4 million. The total purchase price is $34.4 + $34.4 + $137.5 = $206.3 million. Since par is $490.7, then the sales price is $206.3/$490.7 = 42% of par. See my paper about these FDIC transactions at ssrn.com/abstract=1476333

These legacy loans sales means that the FDIC is bullish because they are selling a guarantee on a loan that they don't want to honor and they are retaining a 50 percent equity stake. The real estate bull is the FDIC. The sales price is inflated by the guaranteed non recourse loan see http://ssrn.com/abstract=1428666

thanks linus - that makes sense. 42c on the dollar.. yikes... yeah - i hear you on the FDIC's view. that's another way of saying what i said in the post - the FDIC hasn't reduced their risk by much at all - they need these loans to perform!

VLC - it's kinda redundant: the FDIC is already on the hook... so they finance a loan to someone else to get SOME equity back (in this case, the $34.4MM that was contributed) and if the loans don't go bad, they come out fine. If the loans do go bad, they are hosed, but in a way it's still BETTER than it would have been, because they got $34.4MM more than they would have otherwise.

of course, this is a silly way of looking at it, because they are giving up leveraged upside. (obviously, in this specific example, they share part of the equity, so get part of the upside)

Here's the problem: The other government entities are encouraging pretend and extend. The result is a minimum of 1 year free rent for those same people that owe the money on these same loans. Good luck collecting once this idea gets popular with the same folks that love serial refinancing and no money down.

KD, you're absolutely right. The FDIC (and taxpayer by proxy) is long real estate in this deal, hoping that $0.42 is the low point.

A 50% haircut at these levels would be really bad for the FDIC. Folks who told me stories from about TX & OK during the oil bust were filled with scary tales about oil drilling/rigging equipment being sold for $0.10 - $0.15 on the dollar where the equipment was used as collateral for oil patch loans.

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